When searching and sifting through mountains of confusing and contradictory information about financial retirement savings and plans, you've almost certainly come across the term 401(k).
You may have wondered if that was the latest robot in the Star Wars saga, but it is actually a type of retirement savings plan that allows employees and employers to contribute to a fund that is set aside for your future retirement.
The best way to measure your investing success is not by whether you're beating the market, but by whether you've put in place a financial plan and a behavioral discipline that are likely to get you where you want to go." - Benjamin Graham
People
Many people put their pretax earnings into 401(k) funds, which they can then invest in a variety of mutual funds. These mutual funds are available in a wide range of options, from money market accounts to very aggressive and risky stock portfolios. If you work for one of the many companies across the country that offers a 401(k) plan, you would be literally robbing your future self if you did not take advantage of it.
3 general types of contributions to 401(k) plans:
- Matching Contributions
- Elective Contributions
- Non-Elective Contributions
Matching contributions
Matching contributions are beneficial to employees because the employer matches a predetermined percentage of the funds invested by the employee in this fund. Companies will offer varying amounts for their matching contributions. If your company will match up to a certain percentage of your 401(k) contributions, you should take them up on their offer. This is money that will benefit you later in life and should not be thrown away unless there is a compelling reason to do so.
Elective contribution
An elective contribution is money you invest before taxes are deducted from your paycheck. This means you aren't paying income taxes on these funds at the current tax rate. Many people believe this is a good plan because it assumes you will be in a lower tax bracket when you retire, though there are no guarantees. This is money that you have chosen to invest in your 401(k) plan rather than take home as a salary, hence the name elective contribution.
Non-elective contributions
Non-elective contributions are funds deposited into your account by your employer. In most cases, you will not be able to take this money as cash rather than investing it in your 401(k) plan.
Limitations
There are limits to how much money you can put into your 401(k) plan in a given year. You should check with the IRS for the most up-to-date figures, as they have changed over time and are likely to continue to change as the cost of living rises across the country. After the age of 50, you can make additional contributions to your plan in order to 'catch up' and better prepare for retirement.
Study
When studying the options for financial retirement planning, you should carefully consider taking advantage of any assistance offered by your employer in this regard. If they offer to match the funds you invest in your retirement, you can bet that money has already been deducted from your salary calculations. In other words, they are giving you your money in a different way. The good news is that when it comes time to retire, you will be able to appreciate every dollar you've invested along the way.
We could never hope to simply save the money we'll need to retire. Even investments are difficult for the vast majority of people. As a result, it is a wise investment strategy to take advantage of any opportunity to increase your funds through employer matching contributions. Take advantage of the maximum benefit they will match, and if you are more concerned about your financial future than your current financial situation, invest the maximum allowable amount in your 401 (k) plan each year.
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